question archive During the past major recession, upscale hotels in the United States recently cut their prices by 25 percent in an effort to bolster dwindling occupancy rates among business travelers
During the past major recession, upscale hotels in the United States recently cut their prices by 25 percent in an effort to bolster dwindling occupancy rates among business travelers
Subject:BusinessPrice: Bought3
During the past major recession, upscale hotels in the United States recently cut their prices by 25 percent in an effort to bolster dwindling occupancy rates among business travelers. A survey performed by a major research organization indicated that businesses were becoming wary of bad economic conditions and began resorting to electronic media, such as the Internet and the telephone, to transact business. Assume a company's budget permits it to spend $6,000 per month on either business travel or electronic media to transact business. In the graph below, illustrate this company's budget set if the price of business travel is $1,200 per trip and the price of electronic media is $600 per hour. In the same graph, illustrate this company's budget set after the price of business travel is reduced by 25 percent.
Instruction: Graph both budget sets from where the Quantity of Electronic Media = 0 to where the budget set crosses the X-axis.
Suppose that, after the price of business travel drops, the company issues a report indicating that its marginal rate of substitution between electronic media and business travel is -1. Is the company allocating resources efficiently?
Yes - the marginal rate of substitution is equal (in absolute value) to the ratio of prices.Yes - the marginal rate of substitution is larger (in absolute value) than the ratio of prices.No - the marginal rate of substitution is larger (in absolute value) than the ratio of prices.No - the marginal rate of substitution is smaller (in absolute value) than the ratio of prices.
